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The student debt alert is a sad commentary on the congressional removal of standard consumer protections from the federally guaranteed student loan system. Student loans are currently the only loans in our nation’s history to be exempted from statutes of limitations, basic bankruptcy protections, state usury laws, refinancing rights, truth in lending requirements and even fair debt collection practices. This is compounded by the fact that Congress has enabled the student loan industry to have collection practices that include tax return garnishment, wage garnishment, social security and disability garnishment without a court order. Borrowers can have their professional license and driver’s license suspended. They can also face termination from public employment as a result of the status of their student loan.
This system is predatory by design and as a result it’s virtually impossible to pay it all off. For example, you can take out a loan for 40,000 and after the loan has accrued the amount you owe will be roughly 3 times what you borrowed. Essentially what happens is that the interest is capitalized and the debt grows exponentially. According to 2004 article in the Wall Street Journal by John Hechinger, for every dollar paid out in default claims by the federal government, the US department of education gets back every dollar in principle plus almost 20% in interest and fees. This system makes it rewarding or profitable for a lending institution or guarantor when a borrower defaults.
This is in addition to the fact that the cost of college has risen at double the consumer price index for the past 30 years. This current inflation has placed an immense amount of pressure on those with or without a need for student loans as well as their families. Higher education has vastly turned into a lucrative business for the university, various student loan entities as well as other stakeholders such as financial aid administrators. Fee income for Sallie Mae, the nation’s largest secondary market for student loans, increased by 228% between 2000-2005 while their managed loan portfolio only grew by 87% during the same time period. There is a sense that these lenders are profiting at the expense of many unsuspecting young borrowers. Many of them just have no idea what they are signing up for and the convoluted loan terms simply add to that ambiguity. As a result, many of these borrowers are left without any recourse.
In October 2008, CNN money covered the student loan fugitives. As a generation of young adults who are just starting out in life, many of them see leaving the country as the only way out of their college debt. The Student Loan Scam by Alan Collinge presents a series of case studies that represent a diverse pool of graduates. These graduates have attempted to pursue an independent or a better lot in life only to meet financial catastrophe. Some lives have resulted in suicide over this predator behavior. Sallie Mae has also recently come under fire in Connecticut, Florida and Kentucky for legal allegations of violating federal civil rights and lending practices. This was done by deliberately targeting higher priced loans to students who were attending schools with a large “at-risk” or minority population.
There is a sense that emergency intervention is needed for both past borrowers and present borrowers. Reform is also needed for the next generation of borrowers who will also be the next generation of doctors, lawyers, engineers, artists, educators, engineers, political and social scientists. As a result of this call for social action, hopefully more legislators will become aware of the policies, unethical tactics and methods employed by these loan companies.
Visit student loan justice for more information.
7 Comments
I had no idea that the student loan system had become such a nightmare. Thank you for this excellent post. The link is also very useful.
Digg is open.
Forgive it all — what a wonderful stimulus!
Think of the more constructive ways in which money would recirculate than if paid to the usurers of the student loan industry.
The litany of special protections Congress gave these creditors exceeds virtually any other. They should be scrapped and the government should make these loans directly. Subsidizing them through an exorbitantly expensive and virtually unregulated private sector is a waste of taxpayer funds we cannot afford and a financial cruelty we should end. It has resulted in the resurrection of debtors’ prisons. Redirect those funds into loans themselves. The government can readily “garnish” tax rebates and Social Security payments if need be.
Loans should be repaid where practicable, not at any or all social cost merely to reward predatory lenders.
Excellent post, thanks.
Dugg.
One thing almost unmentioned in your post is that hundreds of graduates have been forced to take jobs on Wall Street and similar stuff where the pay is huge but at the expense of morals and values – all in order to pay off student loans.
Many of these young people would rather work in the non-profit sector, or at jobs where they can provide real value to the people who need their services the most (think poor, rural, etc). But the price of their education places such an intolerable financial burden on them they cannot even begin to see being able to do this – and the student loans are at the bottom of this.
Thanks for bringing this up.
When we first started talking about stimulus, my first thought was to forgive student loans across the board. This would encourage a whole generation of people who are just starting out in life, just starting families, and thus ready to consume. They would consume the basic sorts of things that drive economies–not luxury cars, airplanes, yachts, skiing in Gstaad, and credit default swaps, but apartments, cars, flatware, crockery, diapers, daycare, and all the rest that otherwise has to wait while the loans get reduced. They might even buy a first home somewhat sooner.
I say this as one whose kids have taken no loans. We have (so far) paid out of pocket, because loan terms are so obviously predatory. The kids have gotten no financial aid other than a minor merit-based scholarship, because what counts as wealthy in college financial aid terms is, well, not in real life.
As a former academic, though, I have to doubt that education has become “a lucrative business for the university.” Costs are high, definitely, but with the possible exception of president’s salaries–which I’m told ballooned in the last few years–there’s no sign of colleges or faculty rolling in money. Where I have lived, the colleges have all been chronically underfunded. Moreover, for-profit business and trade schools (like the 1-2 year truck-driing and “information technology” schools that advertise on late-night TV) are responsible (or used to be) for a disproportionate amount of the default on student loans, which at least suggests that they push loans more than real colleges and deliver less in exchange. That said, the private trade schools I know of weren’t exactly high-rolling operations either.
The real culprit is, in my opinion, the massive shift from public financing of higher education to public funding of private lenders. This shift took place starting in the ’80s. We went from government that GAVE students and universities grants of various kinds to government that funds/guarantees lenders who LOAN money to students who in turn use it to pay higher tuition to universities. Students have to scrimp and cut in order to make their loan payments and universities have to scrimp and cut in order to keep tuition at all close to something anyone can pay. The alleged public purposes that justify public investment in education–a more knowledgeable electorate, better prepared workers, and more prosperous consumers–gets sacrificed so that middlemen can siphon off huge profits with little or no risk. As with the rest of our financial system, we have socialized the costs in order to provide an unearned windfall to those that need it least. Then, when the fraud started to cost the public, we enacted laws that punished its victims, protected its perpetrators, and justified the next round of educational cutbacks.
The time has come to cut out all the middlemen, to stop treating government as the sugar-teat of the financial sector and start paying out government money directly. No one should be guaranteed a profit on our money.